Tuesday, January 12, 2016

A Sign of the Times

The averages are down 5.2-6.4%. It's not time to panic....yet.
The stock market is off to its "worst start to [a] year ever":
The massive selloff [last] week adds up to paper losses of roughly $1.5 trillion for the Wilshire 5000 Total Stock Market Index, according to Wilshire.
One doesn't need a finance or economics degree to figure out why: the Fed raised interest rates--and implied that it will continue to do so in 2016--and the Chinese stock market is crashing.

One month ago the Economist, among others, said that a rate hike would be unwarranted based on signals from the global economy.

Overriding these concerns, the Fed chose to tighten because of fears of runaway inflation, which many current policy-makers experienced during the 1970's: [bold added]
But today's economy looks nothing like the economy of the 1970s. Then, labour markets were far more organised; private-sector union density, which peaked at 36% in 1945 and remained above 20% until the mid-1980s, now stands at just 7%. Then, many more workers laboured within large corporations, on contracts with built-in cost-of-living increases tied to the rate of inflation. Then, the world was far less globalised and the automation of the digital age was only beginning to ramp up, leaving employers with many fewer options to adjust the structure of production to accommodate higher wages.
One of the factors that influenced the rate increase was a strong jobs report, which now some have questioned.

The Federal Reserve has access to vastly more data and computer models than outsiders. Fed analysts and directors have PhDs in Economics, Mathematics, and Finance, and lifetime(s) of experience. However, it's a sign of the times that many do not have a great deal of confidence in their judgment.

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